New PAYE rules affecting share-based payments made to former employees

Jan. 27, 2012 - PRLog -- [b}New PAYE rules affecting share-based payments made to former employees, which will take effect on 6 April 2012.[/b}

HMRC has now announced a significant change in the PAYE treatment relating to taxable benefits received by ex-employees resulting from their participation in employee share schemes.  

For such payments on or after 6 April 2012, an employer must use the 0T tax code which applies on a “non-cumulative” basis. This means that none of an individual’s personal allowance is available and, for an employee who is paid on a monthly basis, only 1/12th of the basic rate band (and if relevant, 1/12th of the higher rate band) will be available in the month of payment. Any excess will be taxable at 50%.

If, therefore, a taxable payment of £20,000 in cash is made to a former employee, the first £2,916.67 will be taxed at 20%, the next £9,583.33 at 40% and the balance of £7,500 at 50% (resulting in a tax liability of £8,166.66, instead of £4,000 (£20,000 x 20%) under the previous rules).

Whether starting a new job or not, the employee can submit a claim to recover any overpayment of tax. There could, however, be a significant delay in securing reimbursement, especially if the payment from the former employment was made early in the tax year.

This marks a significant departure from the current position, under which share-based payments to ex-employees are taxed only at basic rate.  Draft regulations (http://www.hmrc.gov.uk/drafts/tax-code-change.pdf) were published on 19 January 2012, and there is a four week period of consultation until 16 February 2012 during which interested parties are encouraged to provide feedback.  This could affect a former employee who receives taxable benefit under, for example:

Non-approved options
EMI options that are no longer fully tax advantaged
CSOPs that are no longer fully tax advantaged
Share Incentive Plans (SIPs) that are no longer fully tax advantaged
SAYE options that are no longer fully tax advantaged
Other employee ownership arrangements that are not tax advantaged
Long Term Incentive Plans (LTIPs)
Growth shares
Joint ownership plans

News release ends, 26 January 2012.

For more information about employee share scheme visit: http://www.postlethwaiteco.com/


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Notes for Editors:
POSTLETHWAITE is a law firm which provides specialist advice on employee share schemes, employee share ownership and majority  employee ownership, including EMI share options, approved options, long term incentive plans, Share Incentive Plans (SIPs), ownership by employee trusts and a wide variety of other share schemes.  We look after clients from all parts of the UK, with a particular focus on smaller listed and private companies.  

For further information concerning employee ownership and employee share incentives, please contact Robert Postlethwaite on 020 7470 8805  11-15 Betterton Street London WC2H 9BP rmp@postlethwaiteco.com

Authorised and regulated by the Solicitors Regulation Authority, number 385417